50+ countries
across the world

Outsourcing leader
since 2008


quality processes

Blog » Top Tax Planning Strategies to Follow

Top Tax Planning Strategies to Follow

Last updated: 04 Jul, 2024 By | 6 Minutes Read

tax planning strategies

Tax planning is crucial to overall business planning and must be handled with due care. Experts suggest that the more you know about your business and its tax-related aspects, the better you can plan for taxation. Every business is unique with a bespoke financial situation, including revenues, expenditures, income, source of funds, and more. As these figures change for a business, so does the tax. To reduce your tax burden, you need to work on these different factors and consider their effect on overall tax computation.

How do you do that? Well, a smart tax strategy tailor-made to your needs is what you need to solve the taxation puzzle. The ultimate goal of tax strategy is to help a business owner minimize tax and save more money to generate wealth faster. The more you refine your tax strategy, the better outcome you can enjoy from your wealth strategy.

So, what should be your tax strategy for the coming financial year?

Impressive Tax Planning Strategies to Minimize Tax Burden and Grow Wealth

1. Have a strategic approach toward your income

The source of your income plays a vital role in tax calculation; most countries have certain sources of income marked under the lower tax category. The ownership of the real estate and agriculture business and production of energy, crops, and certain economy-building pillars is also under lower tax slabs as this business directly supports better economic growth. On the other hand, a consumer of these commodities is charged high tax slabs.

When considering tax planning, you must try to be the producer in an economy rather than a consumer. You must look for active income sources that put you under a low tax slab. While many consider pushing off their income to the next year to take tax advantage, tax experts claim it is sometimes strategic to accelerate your income. Working with a professional tax advisor will help you identify suitable income sources to show so you can take advantage of maximum deductions.

2. Work on your entities

Experts explain entities as a unit established to run a business under its control. Setting up an entity is recommended if you are planning tax. It is proven that adding the correct entity at the right time to empower your portfolio can bring significant tax savings. You will find the former approach way more beneficial when you weigh paying taxes as a business and as an individual.

The different taxation slabs for other entities make this approach a little complicated. It would help if you worked closely with a tax advisor to learn how the taxation for self-employed, an S Corp, a C Corp, or a partnership differs. Often business owners start as a different entity, and once they have achieved certain milestones, they switch to another format to save taxes.

3. Your accounting method is crucial

Businesses can choose their accounting method, especially those with a gross income of less than $25 million. Such businesses can either opt accrual method or the cash method. Both ways have their own set of rules to follow for income and expenditure. Usually, it is experienced that the cash method is more tax saving for a business than the accrual method.

4. Responsible bookkeeping is important

Often considered a dull and time-consuming exercise, bookkeeping plays a vital role in your tax planning. Accurate and time-bound bookkeeping offers the best insights into business’ flow of money. For effective tax planning, you must have up-to-date bookkeeping records, including reconciled balance sheets, error-free balance sheets, and profit and loss statements. The more up-to-date you are, the better facts you have handy about your business for tax planning and strategy development.

5. Maintain the latest documents

Along with bookkeeping, you must consider another aspect of the business documentation. The more information you have to offer your tax advisor, the better he can provide you with taxation advice. This information comes from the proper documents; hence, you must have a steady approach to document maintenance. Documents that you must have handy in your taxation dockets include:

  • Receipts
  • Meeting minutes for your businesses/entities
  • Loan documents between you and your businesses/entities
  • Agreements between you and your businesses/entities
  • Mileage logs
  • Activity logs (particularly in the U.S. for those who claim “real estate professional” status)

6. All your loans and business-related expenses must be evaluated

A widely unknown fact is that taking money from a business as a loan can help you reduce your tax burden. The borrowed money is exempted from tax; hence, you can save your hard-earned money. Having a responsible tax advisor by your side is essential when you decide to take any such step as there are rules to follow.

Also, paying business expenses personally can save you as these payments are exempted under the taxation rules. As a person, you would want to get paid back for any amount you made on behalf of the business.

7. Be watchful for deductions

One of the core reasons people pay more taxes than they owe is poor deduction calculations. Deductions play a vital role in reducing your tax amount, so you must clearly understand the beliefs you are eligible to apply for. A proper documentation process can help you evaluate your eligibility for different deductions.

It has also been observed that a group of people does not claim for decisions as they are afraid of being evaluated for them. Even if an IRS audit happens, you can prove your claim on the findings with the appropriate documentation.

Some deductions that people often miss to claim include:

  • Home office: This isn’t a standard deduction, but in some instances, it can prove a lifesaver and make your taxable income fall below the taxation slab. With a home office deduction, you can also claim for automobile expenses.
  • The 20% pass-through deduction: A way for significant savings for businesses, this deduction came into existence in 2017.
  • Bonus depreciation for real estate investors and syndicators: As per the ruling in 2018, investors can take out bonus depreciation in lumpsum or spread it out. The tax advisor must watch over this deduction as it can do wonders for your tax planning.

    8. Review your giving

    The more you grow, the gentler you become, and maximizing your giving is integral to wealth maximization. While giving is undoubtedly the best way to add to your charities, it also can help you minimize your taxable income. If you manage the donations as per the law, you can take charitable donations into account when calculating the tax. To take advantage of this deduction, you must ensure that you donate to an organization designated as a non-profit 501(c)(3). To get the deductions to benefit, you need not make cash donations but can also make in-kind contributions or donate other physical goods. Again, working with your tax advisor would offer you the best results.

    You must expand your corporate social responsibility or develop the spirit of philanthropy. Some credible ways to do so include offering paid time off to your employees, volunteering for community causes, and offering service. These events must be documented; accordingly, claims for salary deductions, expenses, and more can be made under the premises.

    9. Property purchase and sale can affect your tax planning

    Rental property, equipment, business vehicles, and other investments significantly affect your tax planning. Making property sales and purchases part of your tax planning strategy can help you save a large amount of tax. There are ways where selling a property and using the proceeds to buy another property adds to your savings; your tax advisor can guide you on which opportunity is the best for you to grab.

    10. Hire your minor children as employees

    Working with your minor children as your employees save you outstanding taxes. The salary you pay to the children is tax exempted, keeping you. Additionally, the income of these minor children is taxed at a lower rate than yours or your business’s.

    To conclude

    Tax planning strategies can be very effective when planned and executed wisely. There are several aspects affecting and can maximize or minimize the taxation effects; one must work with a professional tax advisor to learn the best practices to save tax and maximize savings through deductions, bookkeeping, and documentation. These tax planning strategies work differently for different businesses and must be implied only after consultation with an expert tax planner. Follow the right plan from the above and maximize your savings while playing your role as a dutiful taxpayer.

    Cogneesol is an ISO-certified firm that promotes end-to-end data security and high-quality accounting and tax preparation outsourcing services. Get in touch to know more about Cogneesol’s offering with flexible pricing plans. Call us at +1 833-313-3143 or send an email to [email protected].

    Also Read:

    6 Tips to Avoid Burnout During This Tax Season

    8 Tax-Saving Strategies Suggested by Experts for SMBs